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Forex Pair

By: EconomyWatch Date: 23 July 2009

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Currency trading is always done in forex pairs. Of the two currencies constituting a forex pair, one is bought and the other is sold. Together, these two currencies make the ‘exchange rate.’ For example, EUR/USD (Euro and US Dollar) is a popular forex pair. Other commonly traded forex pairs include:

US Dollar and Japanese Yen (USD/JPY)
US Dollar and Swiss Franc (USD/CHF)
British Pound and US Dollar (GBP/USD)

Forex Pair: How it Works

A forex pair has two components:

The base currency (also known as the primary, domestic or accounting currency) is equated as 1. It is placed first in a quote.
The quote currency (also called the secondary, foreign or counter currency) is expressed as a number of units of the base currency.

In the currency pair EUR/USD, Euro is the base currency, while the US dollar is the secondary currency. If the exchange rate is 1.3214, one unit of Euros can be exchanged for 1.3214 US dollars. Suppose the quote for this pair is 1.3214/16. The first part of this quote is called the ‘bid’ price and the second part is known as the ‘ask’ price. While the former is the price at which traders are willing to purchase, the latter is the price at which they are willing to sell.

In this example, one unit of Euro can be sold to get 1.3214 units of the US dollar. However, one will have to pay 1.3216 units of the US dollar to buy one Euro. Forex pairs are typically traded in lots (the standard being 100,000 units) of the base currency. For the above example, $132,160 will have to be paid for buying €100,000.

Forex Pair: Benefits and Dangers

Opt for extensively traded currencies as they are more liquid.
A tight spread ensures higher profits, as the trader pays lower “charges” to the broker. Tight spreads help a trader achieve breakeven faster.
If one focuses on a single forex pair as a beginner, it helps him or her gain confidence. However, restricting trading to one currency pair reduces the profit potential of forex trading. Once traders become sure of how the forex market works, they should add more currency pairs to their portfolio.